Investment Funds 2020

Spain

Authors

Dentons
is the world's largest law firm by headcount, delivering quality and value to clients around the globe. The team in Spain provides market-leading advice on closed-ended fund formation, particularly private equity, direct lending and special situations funds. Clients include promoters in fundraising processes, investors seeking to invest in the primary market (at the initial or final closing of a target fund), or those seeking to invest or divest in the secondary market (through a secondary transaction with other LPs), as well as promoters and investors in “end-of-life” reorganisation processes. The team’s capabilities are complemented with a strong regulatory background; the firm also has wide experience in advising promoters willing to participate in funding rounds organised by Fond-ICO Global, CDTI (Centro para el Desarrollo Tecnológico Industrial) and the EIF (European Investment Fund). Last but not least, the team has proven experience in fund formation for retail funds and hedge funds and, in general terms, in the formation of all kinds of funds.

1. Market Overview

1.1 State of the Market

Spain has developed an active fund market. The two main categories of funds are collective investment schemes (instituciones de inversión colectiva – IICs) and alternative investment funds (fondos de inversion alternativa – AIFs). Please note that certain IICs are also AIFs (in particular, hedge funds or instituciones de inversión colectiva de inversión libre (IICIL) and real estate AIFs). For the purpose of simplification and unless otherwise provided herein, references to IICs will be deemed made to refer to harmonised (UCITS) IICs.

The purpose of IICs is to obtain funds from the general public in order to manage and invest them in certain assets, including, without limitation, traded securities, cash deposits and financial instruments, other IICs and certain derivative instruments. The main AIFs in Spain are private equity entities or entidades de capital-riesgo (ECRs), which are closed-ended investment vehicles that raise funds mainly from professional investors through marketing or private placement. They invest in non-real estate, non-financial, unlisted companies, on a temporary basis. IICs are mainly described and analysed under 3 Retail Funds, while ECRs are essentially reviewed under 2 Alternative Investment Funds.

Investment funds (fondos de inversión – FIs) are the main IICs that are marketed in Spain, and experienced significant growth in 2019: assets under management of FIs increased by roughly 7% between December 2018 and December 2019, according to the Association of Collective investment Schemes and Pension Funds (Inverco). This translates into EUR275.6 billion under management, distributed among roughly 1,250 FIs. The other popular IICs, which are the investment companies with variable share capital or sociedades de inversión de capital variable (SICAVs), are undergoing a period of uncertainty (in part due to a potential increase of taxation, although this has not yet been approved or even announced). Thus, even when their assets under management increased in 2019 as a consequence of the good evolution of the market, the total number of SICAV shrunk by roughly 4% (as of October 2019), in such a way that approximately 1,800 SICAVs were recorded with the Spanish Securities and Exchange Commission (Comisión Nacional del Mercado de Valores – CNMV) (with approximately EUR28.3 billion of assets under management).

Pursuant to the Spanish Association of Capital, Growth and investment (Ascri, the professional association for private equity), private equity increased its assets under management by roughly 16.7% in 2018 and approximately EUR23 billion of assets under management. There are 210 private equity funds (fondos de capital-riesgo – FCRs) registered with the CNMV, and 148 private equity companies (sociedades de capital-riesgo – SCRs). In the private equity space, no less than 27% of the EUR2.178 billion was committed by funds of funds (particularly the European Investment Fund). Commitments by family offices came in a close second, with 20% of the total 2018 fundraising, followed by public investment platforms (particularly Fond-ICO Global) and insurance companies with 11% each. The remaining 20% came from a mix of financial institutions, team commitments, corporate investors, asset managers and other investors.

The investment vehicles analysed herein can be classified as open-ended and closed-ended vehicles:

Open-ended funds:

harmonised FIs and SICAVs (ie, IICs belonging to the family of directives regulating UCITS);

certain AIFs: (i) non-harmonised (ie, non-UCITS) FIs and SICAVs, (ii) hedge funds created as funds (fondos de inversión libre – FILs), and (iii) funds of hedge funds (IICIICIL). Sociedades de inversión inmobiliaria (SIIs) and fondos de inversión inmobiliaria (FIIs) would also belong to this category. For the purpose of this analysis, any non-UCITS vehicle will be categorised as an AIF.

Closed-ended funds: this category would comprise the following vehicles:

real estate investment companies (SIIs), although, for certain purposes, these can be considered as open-ended funds, and therefore they are referred to herein in some occasions as open-ended funds;

ECRs (including ECR-Pymes, European venture capital funds and European social entrepreneurship funds); and

Entidades de Inversión Colectiva de Tipo Cerrado(EICCs).

The existence of real estate investment trusts (known as listed corporations for the investment in real-estate market, or sociedades cotizadas de inversión en el mercado inmobiliario – SOCIMIs for their Spanish acronym) should also be mentioned. These vehicles, which are regulated and governed by Spanish Act 11/2009, will not be analysed herein, due to the fact that they are not categorised as AIFs or IICs. The legal regime of Real Estate AIFs (ie, real estate investment companies or sociedades de inversión inmobiliaria – SII and real estate investment funds or fondos de inversión inmobiliaria – FIIs) will also not be analysed. SOCIMIs have become popular in recent years, while the popularity of SIIs and FIIs among investors has dwindled dramatically, and SOCIMIs have occupied the place that these vehicles held in the real estate world. By way of example, the CNMV has registered more than 100 SOCIMIs, while only three SIIs (one of them in liquidation) and two FII (both in liquidation) are currently registered with the CNMV.

2. Alternative Investment Funds

2.1 Fund Formation

2.1.1 Fund Structures

Common Structures Used for Alternative Investment Funds

Although any collective investment scheme that does not qualify as UCITS may technically be considered an alternative investment fund (AIF), the more common AIFs operating in the Spanish market can be categorised as hedge funds, real estate funds and private equity funds.

Hedge funds

The Spanish hedge fund is the Institución de Inversión Colectiva de Inversión Libre (IIC de Inversión Libre – IICIL).

These are open-ended, non-harmonised collective investment schemes that may invest in a wide variety of financial assets, including derivatives and other financial instruments.

Also worth mentioning is the widely popular Sociedad Anónima Cotizada en el Mercado Inmobiliario (SOCIMI), which has taken over the market and is currently considered the "Spanish REIT", although it is not technically an AIF in accordance with Spanish law. As previously set forth, SOCIMIs will be excluded from this analysis.

Fondos de Capital-Riesgo (FCRs): private equity investment vehicles organised as funds. Master-feeder structures are allowed as FCRs may invest 100% of their assets in other ECRs, subject to diversification requirements;

Sociedades de Capital-Riesgo (SCRs): private equity investment vehicles organised as corporations. Master-feeder structures are also allowed, on the same terms as FCRs;

For the sake of completeness, the following AIFs are less frequently used in Spain, but are still available:

other non-harmonised (non-UCITS) collective investment schemes;

European Venture Capital Funds (EuVECA); and

European Social Entrepreneurship Funds (EuSEF).

Advantages and Disadvantages

Hedge funds (IICILs)

Hedge funds organised as IICILs may invest in a wide variety of financial assets. They benefit from a special 1% corporate income tax rate (explained in 2.6 Tax Regime) and constitute an eligible asset for multiple Spanish institutional investors. They are also very flexible structure-wise – ie, they can have compartments, and master-feeder structures are possible through fund-of-funds vehicles (IICIICILs).

However, IICILs must comply with certain requirements, including the following:

a minimum of 25 investors;

a minimum initial investment of EUR100,000 (not applicable to professional clients);

at least half-yearly redemptions with a potential one-year initial lock-up period and redemption gates (this lock-up period can be extended when the illiquidity of the underlying asset so recommends, but only for Further Assets for Hedge Funds, such as those referred to in 2.3.1 Regulatory Regime); and

a maximum leverage of five times their net asset.

Real estate funds (IIC Inmobiliarias)

Real estate funds organised as IIC Inmobiliarias may invest in urban real estate properties for subsequent lease. They benefit from a special 1% corporate income tax rate (explained in 2.6 Tax Regime) and constitute an eligible asset for multiple Spanish institutional investors.

They can have compartments, and two-tier structures are also possible – ie, IIC Inmobiliarias may invest in companies whose assets are mainly real estate properties leased to third party tenants, as well as other IIC Inmobiliarias and SOCIMIs.

However, IIC Inmobiliarias must comply with certain requirements, including the following:

a minimum of 100 investors;

at least annual redemptions (subject to potential redemption gates) and a minimum 10% liquidity coverage ratio, when organised as funds;

diversification requirements (ie, no single asset may represent, ab initio, more than 35% of the IIC's net asset value); and

the acquisition of portfolio assets may be leveraged (mortgage-backed) up to a maximum of 50% the IIC's net asset value, but an additional 10% indebtedness may be incurred to manage treasury shortage.

Private equity (ECRs, ECR-Pymes and EICCs)

Private equity funds organised as ECRs invest mainly in equity instruments issued by non-financial, non-real estate, unlisted target entities. They benefit from a special 99% exemption on capital gains achieved on their portfolio investments and a 100% exemption on dividends received (explained in 2.6 Tax Regime). They may also grant so-called profit participating loans, but these are limited to 30% of their assets, unless they are contingent on the debtor achieving profits. There is no minimum number of investors or minimum investment requirements (although marketing to certain categories of investors may require a minimum investment commitment, as explained in 2.2.3 Restrictions on Investors) and, as they are closed-ended vehicles, ECRs are not subject to redemption requirements or liquidity coverage ratios. Finally, there is currently no limitation on the indebtedness of an ECR as a matter of Spanish law.

ECRs are subject to diversification requirements – ie, they may not invest more than 25% of their assets in a single target entity (or 35% in target entities belonging to the same group).

ECR-Pymes are ECRs focusing on SMEs and possess greater flexibility to invest via debt-instruments, including profit participating loans (without limitation) and/or regular loans to portfolio companies. Also, diversification thresholds are raised to 40% (both per target entity and per group). As an ECR sub-category, ECR-Pymes benefit from the 99% exemption on capital gains and 100% exemption on dividends, as explained in 2.6 Tax Regime.

It should be noted that SMEs are defined as non-financial, non-real estate, unlisted entities with fewer than 250 employees and either annual assets not exceeding EUR43 million, or annual turnover not exceeding EUR50 million.

EICCs are financial or non-financial closed-ended collective investment schemes with the ability to carry out any defined investment policy. They also have no minimum capital or assets. Otherwise, the rules on ECRs are applicable on a subsidiary basis to EICCs. However, they do not enjoy a special tax treatment – ie, they are corporate income taxpayers without any specific exemption, as explained in 2.6 Tax Regime.

Investment Instruments

When organised as funds, investments in AIFs take the form of a subscription of units (participaciones), which normally conveys an economic interest (propiedad) without the full array of political rights (dominio). As a result, AIFs organised as funds require the appointment of an external manager (sociedad gestora) and, therefore, cannot be set up as self-managed entities.

AIFs organised as corporations are companies in their own right and, as such, are governed by the Spanish Companies Act (Legislative Royal Decree 1/2010 of July 2nd) on a subsidiary basis.

This has the following implications:

investments will take the form of subscriptions of shares (acciones), conveying not only an economic interest but also political or voting rights, as well as information rights;

they may be self-managed, normally through a board of directors – ie, there is no need to appoint an external manager. However, if self-managed, the full suite of AIFMD implementing regulations will apply to the AIF itself;

they must be registered with the Companies House (Registro Mercantil) of their domicile and comply with standard corporate reporting formalities (ie, the filing of annual accounts), in addition to any reporting obligations set forth by financial regulation; and

corporate governance and share transfers are subject to the rules and limitations set forth in the Spanish Companies Act, rather than freely established in the constituent documents of a fund.

Principal Vehicles for Managers

AIFs organised as funds lack legal personality (ie, they are segregated asset pools) and must therefore be externally managed, whilst AIFs organised as corporations have legal personality and may elect between self-management (ie, the board of director will manage the assets of the AIF) and external management (ie, the management of their assets will be vested with a fund manager).

The principal vehicles for managers in Spain are the Sociedad Gestora de Instituciones de Inversión Colectiva (SGIIC) and the Sociedad Gestora de Entidades de Inversión Colectiva de Tipo Cerrado (SGEIC).

SGIIC v SGEIC – managed entities

SGIICs are highly regulated management companies capable of managing UCITS as well as the full array of Spanish AIFs (ie, open-ended and closed-ended).

SGEICs are less regulated but are only allowed to managed the following closed-ended AIFs:

Entidades de Capital-Riesgo (ECRs);

Entidades de Capital-Riesgo-Pyme (ECR-Pyme);

Entidades de Inversión Colectiva de tipo Cerrado (EICC);

European Venture Capital Funds (EuVECA); and

European Social Entrepreneurship Funds (EuSEF).

Characteristics of SGIICs

The main corporate purpose of SGIICs is portfolio management and risk management, but they can also provide general administration and representation services, and organise subscriptions and redemptions of units and shares of their managed funds.

As complementary services, they may also carry out:

discretionary portfolio management (including portfolios of pension funds), on the basis of a mandate given by investors; and

The minimum capital for an SGIIC is EUR125,000, which must be fully paid-up from incorporation (though such minimum share capital is increased depending on certain variables and, inter alia, the assets under management).

SGIICs must be authorised by the CNMV within three months of the application, but the CNMV may grant an additional three-month extension if it deems it appropriate. The "tacit" or "deemed" approval rule set forth in the Public Administration Act (Act 39/2015, of October 1st) applies and, therefore, in the absence of an express resolution, the SGIIC will be deemed authorised.

Characteristics of SGEICs

The main corporate purpose of SGEICs is portfolio management and risk management, together with the administration and commercialisation of their managed funds.

Like SGICCs, the minimum capital of an SGEIC is EUR125,000, which must be fully paid-up from incorporation (though such minimum share capital is increased depending on certain variables and, inter alia, the assets under management).

SGEICs must also be authorised by the CNMV within three months of the application, subject to an additional three-month extension if the CNMV deems it appropriate. The "tacit" or "deemed" approval rule also applies to the authorisation of SGEICs.

2.1.2 Common Process for Setting up Investment Funds

The process for setting up an AIF is different for open-ended funds (IICs) and closed-ended funds (ECRs, ECR-Pymes and EICCs).

Open-ended AIFs (IICILs and Real Estate IICs)

IICILs and real estate IICs must be authorised by and registered with the CNMV. In this section, reference to IICs will be construed as reference to IICILs or to real estate IICs, as applicable.

The application must include an incorporation memorandum, accreditation of the good reputation and professionalism of the individuals vested with administration and managerial positions in the IIC and, generally, all data and background information required to verify compliance with the applicable law.

If the IIC is organised as a fund, the application must include a prospectus, a key investor information document (KIID) and the fund's management regulations. If the IIC is organised as a corporation that has not appointed an external manager, an activity report must be attached to the application, covering the organisational structure of the IIC, together with the IIC's articles of association.

Applications for externally managed IICs (ie, all funds, as well as all IICs organised as corporations that elect to vest management of their assets with a management company) must be resolved by the CNMV within two months of the submission of the complete document pack. For self-managed IICs, the term will be three months. The "tacit" or "deemed" approval rule set forth in the Public Administration Act (Act 39/2015, of October 1st) will apply five months after the submission of a complete application and, therefore, in the absence of an express resolution, the IIC will be deemed authorised.

All IICs must be registered with the CNMV before they commence their activity and, if the IIC is organised as a corporation, registration with the Companies House (Registro Mercantil) of its domicile is also required. IICs organised as funds may elect to register with the Companies House (Registro Mercantil), but are not obliged to do so. Pursuant to Spanish law, the notary public has up to five business days to deliver the deeds. In practical terms, the Companies House may take between two and four weeks to record the deeds.

The process of setting up an IIC is relatively cheap.

Closed-ended AIFs (ECRs, ECR-Pymes and EICCs)

In line with AIFMD, externally managed ECRs, ECR-Pymes and EICCs are not subject to prior authorisation requirements, but they must be registered with the CNMV before they can commence their activity. On the other hand, self-managed SCRs, SCR-Pymes and SICCs are subject to the same prior authorisation regime as SGEICs.

When organised as funds, the constituent document (which may be a public deed or a private agreement) must contain basic particulars, such as the name of the fund, the purpose, the initial fund size, the name and address of the management company and the fund's management regulations. The management regulations must cover matters such as investment policy, calculation of the net asset value, the subscription and redemption of units, and management fees.

When organised as corporations, the rules of the Spanish Companies Act (Legislative Royal Decree 1/2010 of July 2nd) apply, but it is common practice to replicate the cornerstone provisions of a fund's management regulations in the articles of association of the SCR, SCR-Pyme or SICC (as applicable) and (if externally managed) the management agreement.

ECRs, ECR-Pymes and EICCs organised as corporations must be registered with the Companies House (Registro Mercantil) of their domicile. If organised as funds, they may elect to register with the Companies House (Registro Mercantil), but are not obliged to do so. Pursuant to Spanish law, the notary public has up to five business days to deliver the deeds. In practical terms, the Companies House may take between two and four weeks to record the deeds.

The process of setting up an ECR, ECR-Pyme or EICC is relatively cheap.

2.1.3 Limited Liability

The liability of investors in open-ended AIFs (ie, IICILs and real estate IICs) is limited to the amounts contributed by such investors.

ECRs, ECR-Pymes and EICCs are also limited liability entities, and investors are generally not liable for the debts of the AIF.

However, due to their closed-ended nature, investments in ECRs, ECR-Pymes and EICCs are normally documented through capital commitments and the right to call any undrawn amounts may be considered as an asset of the fund, and is often pledged or assigned as security to any existing fund financing. This has led the industry to consider that the liability of investors in ECRs, ECR-Pymes and EICCs with outstanding capital commitments is limited to the full amount of their capital commitments (whether drawn or undrawn) and not only to their contributed amounts. This structure of commitments is also acceptable for the CNMV in certain circumstances (to be decided on a case-by-case basis, depending on the underlying asset) in the case of IICILs.

2.1.4 Disclosure Requirements

Disclosure requirements are also different for open-ended funds (IICs) and closed-ended funds (ECRs, ECR-Pymes and EICCs).

Open-ended AIFs (IICILs and Real Estate IICs)

SGIICs must publish and distribute to investors the following disclosure package in respect of each of its managed AIFs:

a prospectus;

a key investor information document (KIID);

an annual report;

a half-yearly report; and

two quarterly reports.

These documents should be updated to disclose at all times any circumstances that may influence the AIF's net asset value, the inherent risks involved in investing in the AIF, and its compliance with the applicable regulations.

In addition, the CNMV has general powers to request any additional information and disclosure from SGIICs as it deems appropriate, with respect to their managed AIFs.

Closed-ended AIFs (ECRs, ECR-Pymes and EICCs)

SGEICs must publish and distribute to investors the following disclosure package in respect of each of its managed AIFs:

a prospectus; and

an annual report.

In particular, the annual report must include the annual accounts, the management report, the audit report, any material change in the information provided to investors during the reporting year, and information on the SGEIC's remuneration.

2.2 Fund Investment

2.2.1 Types of Investors in Alternative Funds

Although they can be marketed to retail investors, AIFs are normally invested in by professional investors, including institutional investors (eg, funds of funds, pension funds and insurance companies) and family offices. The different figures for AIFs are reviewed under 1.1 State of the Market.

2.2.2 Legal Structures Used by Fund Managers

Please see 2.1.1 Fund Structures.

2.2.3 Restrictions on Investors

IICILs and real estate IICs may generally be invested in by both professional and retail investors, although certain requirements may apply to the marketing of hedge funds (IICILs).

Shares and units in ECRs, ECR-Pymes, EICCs and IICILs can be acquired by both professional and retail investors. There are certain restrictions for retail investors, as set forth under 2.3.6 Marketing of Alternative Funds.

2.3 Regulatory Regime

2.3.1 Regulatory Regime

Open-ended AIFs (IICILs and real estate IICs) are regulated by the Collective Investment Schemes Act (Act 35/2003, of November 4th) and its implementing regulation (Royal Decree 1082/2012, of July 13th).

IICs may be of a financial and or a non-financial nature (the latter being mainly real estate or IICI Inmobiliarias).

Hedge funds (IICILs) can invest in the same assets as financial IICs (ie, traded securities, cash deposits and financial instruments, other IICs and certain derivatives), and can also invest in raw materials that are traded in a secondary market, shares and units of other hedge funds and any other asset that is authorised by the CNMV.

Hedge funds can also invest in receivables (facturas), loans (provided that such loans are not granted to individuals and, in the event of a secondary market of loans, when such financing has been granted more than three years ago), financial assets linked to investment strategies of more than one year, and derivatives (provided that the settlement thereof does not imply the inclusion of the hedge fund in the balance sheet as a non-financial asset). All these assets shall be referred to as Further Assets for Hedge Funds.

IIC Inmobiliarias will invest mainly in urban real estate properties for subsequent lease. Diversification requirements apply, which vary in accordance with the asset class, but the general threshold is 5% for securities from the same issuer and 15% from the same issuing group.

Closed-ended AIFs (ECRs, ECR-Pymes and EICCs) are regulated by the Venture Capital and Closed-Ended Collective Investment Schemes Act (Act 22/2014, of November 12th).

ECRs and ECR-Pymes may invest in unlisted entities that are neither real estate companies nor financial entities, whilst EICCs may carry out any alternative investment strategy. ECRs and EICCs may not invest more than 25% of their assets in a single target entity or 35% of their assets in the same target group. In the case of ECR-Pymes, both thresholds are raised to 40%.

2.3.2 Requirements for Non-local Service Providers

Custodians (depositarios) rendering services to Spanish AIFs must either have a registered domicile in Spain or operate through a Spanish branch. Administration services are normally rendered by the management companies themselves, and directors (of AIFs or of their management companies) may be Spanish or foreign nationals. Such directors will be subject to the same set of rules, regardless of their potential belonging to or relationship with (via employment or consultancy agreement) a service provider.

2.3.3 Local Regulatory Requirements for Non-local Managers

EU management companies authorised under Directive 2011/61/UE of June 8th may also manage Spanish ECRs, ECR-Pymes and EICCs directly (freedom to provide services) or through a Spanish branch. Any such activities may only commence once the CNMV has received a communication from the financial regulator of the EU management company indicating (i) the services to be rendered and the entities to be managed, and (ii) if a local branch is to opened, its organisation structure, the address of the branch and the contact details of those individuals with managerial responsibilities regarding the branch.

The process starts by requesting the relevant passport authorisation from the home country regulator. There is a communication between supervisors. When the entity intends to act under freedom to provide services, the process finishes when the CNMV receives the communication from the home supervisor. When a branch is to be set up, once the supervisors have successfully exchanged communications, a deed of creation of the branch must be granted before a notary public, and such deed must be recorded with the Companies House (Registro Mercantil) and with the special registry of the CNMV.

The timeframe to passport depends on the time needed by the home supervisor to generate the intra-supervisor documentation. However, a range of between four and six months to passport a manager is realistic. Apart from that, the terms for notarisation and recording with the Companies House that have been indicated in other sections apply (please see 3.1.2 Common Process for Setting up Investment Funds).

In addition to the above, non-EU managers can also act in Spain by establishing a branch. This entails an authorisation process being carried out before the CNMV, without prejudice to the local requirements for such supervisor in its home country.

2.3.4 Regulatory Approval Process

IICs (including IICILs and real estate IICs) are regulated and must be authorised by the CNMV before they can start operations.

In line with AIFMD, externally managed ECRs, ECR-Pymes and EICCs are not subject to prior authorisation requirements – only their management entities (SGEICs or SGIICs) are. Self-managed SCRs, SCR-Pymes and SICCs are subject to the same prior authorisation regime as applies to SGEICs.

Please see 2.1.2 Common Process for Setting up Investment Funds for additional details on prior authorisation requirements and process.

2.3.5 Rules Concerning Marketing of Alternative Funds

The marketing of open-ended AIFs (IICILs and real estate IICs) is regulated by the Collective Investment Schemes Act (Act 35/2003, of November 4th) and its implementing regulation (Royal Decree 1082/2012, of July 13th).

The marketing of closed-ended AIFs (ECRs, ECR-Pymes and EICCs) is regulated by the Venture Capital and Closed-Ended Collective Investment Schemes Act (Act 22/2014, of November 12th).

2.3.6 Marketing of Alternative Funds

IICs may generally be marketed to both professional and retail investors, although hedge funds (IICILs) can only be marketed to retail investors if such investors invest a minimum of EUR100,000 and issue a written representation that they are aware of the risks inherent to the investment. Please note that those hedge funds investing in Further Assets for Hedge Funds, as described in 2.3.1 Regulatory Regime, can only be marketed to professional investors.

Shares and units in ECRs and ECR-Pymes can be marketed to both professional and retail investors, provided, however, that such retail investors commit to invest a minimum of EUR100,000 and represent in writing (in a document separate from their investment commitment) that they are aware of the risks inherent to their investment.

The minimum investment and representation letter requirements referred to above will not apply to directors, officers or employees of the management company, nor when the ECR or ECR-Pyme is listed in a stock exchange, nor to investors evidencing their expertise in the investment in, management of or providing advice to similar ECRs or ECR-Pymes.

Shares and units in EICCs can only be marketed to professional investors.

2.3.7 Investor Protection Rules

As explained in 2.3.6 Marketing of Alternative Funds, hedge funds (IICILs) can only be marketed to retail investors if such investors invest a minimum of EUR100,000 and issue a written representation that they are aware of the risks inherent to the investment, and provided that such hedge funds do not invest in Further Assets for Hedge Funds, as described in 2.3.1 Regulatory Regime.

Similarly, shares and units in ECRs and ECR-Pymes can only be marketed to retail investors if such investors commit to invest a minimum of EUR100,000 and represent in writing (in a document separate from their investment commitment) that they are aware of the risks inherent to their investment.

Finally, shares and units in EICCs cannot be marketed to retail investors.

As explained in 2.1.4 Disclosure Requirements, both open-ended AIFs (IICILs and real estate IICs) and closed-ended AIFs (ECRs, ECR-Pymes and EICCs) must comply with disclosure requirements, including providing a prospectus laying down any circumstances that may influence the AIF's net asset value, the inherent risks involved in investing in the AIF, and its compliance with the applicable regulations.

2.3.8 Approach of the Regulator

The CNMV is very friendly and approachable, welcoming initial face-to-face meetings regarding the incorporation of new management companies or the expansion of their activities.

Email addresses of the officers involved in the handling of regulatory files are made available to applicants, and senior officers go as far as to take impromptu calls to clarify doubts and discuss informally any obstacles that may arise in the context of a regulatory approval process.

2.4 Operational Requirements

Please see 2.1.1 Fund Structures and 2.3.1 Regulatory Regime for eligible assets and/or types of investments that may be undertaken by Spanish AIFs.

Open-ended AIFs (IICILs and real estate IICs) must appoint an independent custodian (depositario), who needs to be authorised by, and registered with, the CNMV. Management companies of closed-ended AIFs (ECRs, ECR-Pymes and EICCs) must also appoint a custodian (depositario), unless their assets under management fall below EUR100 million, or below EUR500 million if their managed AIFs are unleveraged and do not grant investors redemption rights during a period of five years.

Open-ended AIFs (IICILs and real estate IICs) are subject to the following borrowing restrictions:

hedge funds (IICILs) and funds-of-funds (IICIICILs) may incur indebtedness up to five times their net worth, as long as it is consistent with their investment policy (and, in particular, debt funds organised as IICILs cannot be leveraged at all); and

IICIs can be leveraged up to 50% of their equity.

The CNMV is authorised to issue regulations imposing borrowing restrictions on closed-ended AIFs (ECRs, ECR-Pymes and EICCs), but no such regulations have yet been put in place.

2.5 Fund Finance

Fund finance has become popular in the last few years in the Spanish market. At the outset, international groups (both credit institutions and debt funds) were involved in this business, but many domestic groups (again, including credit institutions and debt funds) have now also granted fund finance.

Restrictions on borrowings have been set forth in 2.4 Operational Requirements. When taking security interests over the commitments of the investors, the affected investors have to be served notice, in order to perfect the security in accordance with the Spanish Civil Code, as construed by the case law of the Supreme Court for pledges over receivables and credit rights. The inclusion of potential indebtedness in the limited partnership agreements (reglamentos de gestión) or bylaws (estatutos), as applicable, is now market practice and avoids complaints from investors alleging that indebtedness was not foreseen in the funds' constitutional documents. In addition, the financiers will have to review that no side letters have been entered into with investors in relation to indebtedness, including "most-favoured nation" (MFN) clauses. In general terms, all the constitutional documents and all the bilateral documentation of each of the investors must be analysed, in order to make sure that the fund finance is feasible.

Investment vehicles mainly offer two kinds of security interests in fund finance: (i) pledge over the credit rights stemming from bank accounts, and (ii) pledge of rights stemming from the commitment of investors. The latter is usually granted along with an irrevocable power of attorney that permits the pledgee to carry out the capital call, for the purposes of potentially enforcing the security interest. In some circumstances, certain lenders can request pledges over shares, but this security interest is not as popular as the others, because the charged asset is not liquid.

Setting aside the potential risks stemming from the constitutional documents, one of the main issues arising in the negotiation of the documents is the communications to the investors, which is a commercial matter rather than a legal one. Fund managers are often concerned about the content of notices of the pledges to the investors, because this could raise concerns from the investors, and they want them to be drafted as amicably as possible (and also to make it clear that the investor does not have to do anything). On the other side, the lender is concerned about the necessity to submit the notice, because the reception of the notice perfects the pledge under Spanish law. The lender also prefers to obtain an acknowledgement from the investor, in order to avoid problems in potential bankruptcy scenarios (and even when many scholars consider that entities without legal personality are not eligible to file for bankruptcy).

2.6 Tax Regime

Hedge funds (IICILs) are subject to a special corporate income tax (CIT) regime that includes the application of a 1% rate, provided that they comply with the minimum investor requirement of the Collective Investment Schemes Act.

Real estate AIFs (FIIs or SIIs) must also comply with specific tax requirements (mainly referring to the minimum holding periods of their assets or to their development activities) in order to qualify for the reduced 1% rate.

Open-ended AIFs that do not comply with the applicable requirements would be subject to the general 25% CIT rate, as any other Spanish entity.

Open-ended AIFs benefiting from the special 1% rate do not qualify for the application of the general double tax credit system (such as the participation exemption regime or tax credits provided to avoid double taxation).

ECRs and ECR-Pymes regulated by the Venture Capital and Closed-Ended Collective Investment Schemes Act are subject to the general 25% CIT rate, but enjoy a minimum 99% exemption on capital gains achieved on their portfolio investments, subject to a holding period of one year (and a maximum of 15 years). They also enjoy the exemption on dividends received from their portfolio investments (irrespective of the stake and the holding period).

EICCs have no special tax treatment. They are subject to CIT as any other Spanish entity.

Dividends and capital gains obtained by resident individuals are subject to personal income tax (PIT), at a rate ranging between 19% and 23%.

Tax deferral is achievable if investment proceeds are directly re-invested in other eligible IICs under a regulated rollover process (régimen de traspasos), but certain requirements may apply – eg, SILs and SIIs must have a minimum of 500 investors and the incumbent investor's stake should not exceed 5% (during the previous 12 months).

Dividends and capital gains of these individual investors on IICs are subject to tax withholding, unless the rollover regime (régimen de traspasos) applies.

For Spanish corporate investors and non-resident corporate investors acting through a permanent establishment in Spain, dividends and capital gains are taxed at the general 25% rate without the benefit of the double tax credit system (the participation exemption regime or deduction for international double taxation) when the underlying IIC was subject to the reduced 1% CIT rate.

Any other non-resident investor (individuals or corporate investors without a Spanish permanent establishment) will be taxed on dividends and capital gains obtained from IICs at source (19%) unless otherwise provided in accordance with any applicable double tax treaty or EU Directive.

Investment in ECRs and ECR-Pymes

Dividends and capital gains obtained by resident individuals are subject to personal income tax (PIT), at a rate ranging between 19% and 23%.

Spanish corporate investors and non-resident corporate investors acting through a permanent establishment in Spain can enjoy a 100% exemption (irrespective of the stake and the holding period).

Any other non-resident investor (individuals or corporations without a Spanish permanent establishment) will not be taxed on dividends and capital gains on their investments in ECRs and ECR-Pymes, unless they are located in a tax haven (in which case they will be subject to 19% non-resident income tax).

Investment in EICCs

Dividends and capital gains obtained by resident individuals are subject to general PIT, at a rate ranging between 19% and 23%.

Income derived by Spanish corporate investors and non-resident corporate investors acting through a permanent establishment in Spain will be taxed at the general 25% rate, but such investors will be entitled to the general special participation exemption regime, which requires a minimum 5% stake (or EUR20 million investment) and a one-year holding period.

Any other non-resident investor (individuals or corporations without a Spanish permanent establishment) will be subject to Spanish tax on dividends and capital gains obtained from their investments in EICCs (generally at 19%), unless otherwise provided in accordance with any applicable double tax treaty or EU Directive.

3. Retail Funds

3.1 Fund Formation

3.1.1 Fund Structures

These funds are open-ended entities, and the two main types are UCITS FIs and UCITS SICAVs. FIs are pools of assets without legal personality belonging to a plurality of investors, and need to be managed by an SGIIC. An FI has a minimum of 100 unitholders (when the FI has several sub-funds, the number of unitholders per sub-fund cannot be lower than 100). FIs can typically can invest in traded securities, cash deposits and financial instruments, other IICs and certain derivative instruments, so can invest in liquid financial assets and their activity must be governed by the principle of risk spreading. The liquidity of the underlying assets permits the unitholder to be reimbursed within one or a few days of the reimbursement request.

FIs must have minimum capital (patrimonio) of EUR3 million. In the event of sub-funds, the minimum capital per sub-fund must amount to EUR600,000, without prejudice to the EUR3 million capital for the entire fund.

Notwithstanding all the above, FIs can be created with a capital of EUR300,000 (EUR60,000 per sub-fund, where applicable), subject to the minimum capital(s) referred to above being reached within six months. The FI will be wound up and liquidated otherwise.

SICAVs are IICs adopting the legal form of corporations, which are entitled to invest in the same assets as the FIs. SICAVs have a minimum of 100 shareholders and a minimum share capital of EUR2.4 million, which must be entirely subscribed and paid up (as well as maintained at any moment) as of the date of incorporation of the SICAV. The maximum share capital to be included in the bylaws cannot exceed the initial share capital by more than ten times.

SICAVs can be self-managed or managed by an SGIIC, with the latter being the most common.

If the SICAV is divided into sub-funds (compartimentos), each sub-fund must have a minimum paid-up share capital of EUR480,000.

3.1.2 Common Process for Setting up Investment Funds

The creation of an IIC requires authorisation from the CNMV, which is granted within two months of the request, for FIs and SICAVs that are managed by an SGIIC; the CNMV has three months to grant authorisation for self-managed SICAVs. In any event, the authorisation will be deemed granted when five months have elapsed.

Once the authorisation is granted, SICAVs must be (i) incorporated in a deed authorised by a notary public, (ii) registered with the Companies House (Registro Mercantil), and (iii) registered with the special registry of the CNMV. Pursuant to Spanish law, the notary public has up to five business days to deliver the deeds. In practical terms, the Companies House may take between two and four weeks to record the deeds.

FIs can be formed in a private document (no need for a deed) and do not need to be recorded with the Companies House (Registro Mercantil), although they do have to be recorded with the special registry of the CNMV.

The process of incorporation should not be expensive. In addition to lawyers' fees, the following fees are to be paid:

notarial fees;

the fees of the registrar of the Companies House; and

the fees of the CNMV (where applicable), in the case of SICAVs.

For FIs that are not formed in a deed and not recorded with the Companies House, the only fees to be paid (apart from the lawyer’s fees) will be the CNMV’s fees (where applicable).

The main documentation for IICs is the prospectus, the bylaws (only for SICAVs), and the management regulations (reglamento de gestión). A key investor information document (KIID) must also be prepared. If the IIC is organised as a corporation that has not appointed an external manager, the application must attach an activity report, which must include the organisational structure of the IIC. Please also note that IICs are audited.

3.1.3 Limited Liability

The liability of investors in IICs is limited to the amounts contributed by such investors.

3.3 Regulatory Environment

3.3.1 Regulatory Regime

3.3.2 Requirements for Non-local Service Providers

In general terms, non-Spanish operators are subject to the following restrictions.

Service providers: no general restrictions exist, provided that they do not render regulated services. The position of service providers should be analysed on a case-by-case basis.

Depositary: the depositary must comply with the characteristics set forth in 3.4 Operational Requirements.

Directors: non-Spanish nationals can act as directors of SICAVs (FIs do not have directors), provided that they comply with all regulatory requirements set forth in the law. Non-Spanish directors also need a Spanish foreigner identification number (número de identificación de extranjeros).

3.3.3 Local Regulatory Requirements for Non-local Managers

EU management companies authorised under Directive 2009/65/CE of July 13th or Directive 2011/61/UE of June 8th may manage Spanish IICs directly (freedom to provide services) or through a Spanish branch.

Please see 2.3.3 Local Regulatory Requirements for Non-local Managers with respect to the passport of managers of a Member State of the European Union.

Managers of a non-EU jurisdiction can also set up branches, but the creation of the branch is subject to authorisation by the CNMV (without prejudice to further authorisations required under the law of the home country). The period to authorise is between three and six months in Spain, and a deed of creation of a branch must be granted; therefore, the timeframe to grant and record notarial documents is also applicable in this case (please see 3.1.2 Common Process for Setting up Investment Funds).

Lastly, managers of a non-EU jurisdiction can also act in Spain under freedom to provide services, again in a context of authorisation in Spain and without prejudice to potential authorisations to be granted in their home country.

Please note that, in the case of non-EU authorisations, the CNMV can deny or condition the authorisation, as applicable, due to prudential reasons, absence of reciprocity in the home country of the manager, or when compliance with Spanish law may not be guaranteed.

Please note that authorisations for non-EU entities would also be applicable to the equivalent of open-ended AIF managers.

3.3.4 Regulatory Approval Process

Please see 3.1 Fund Formation.

3.3.5 Rules Concerning Marketing of Retail Funds

IICs must be registered with the CNMV prior to being marketed in Spain. The manager must approve a communication policy.

Prior to starting activity, managers intending to market IICs will have to file a statement of activities with such intention with the CNMV, including a memorandum explaining the execution of this and the capacity of the manager to comply with the requirements of the CNMV.

The CNMV has banned certain behaviour when marketing IICs, such as forecasting and/or simulating prospective profitability by using data of former years, or highlighting the profitability as an essential feature of a communication.

3.3.6 Marketing of Retail Funds

Spanish law defines marketing, for the case of these vehicles, as the obtainment of clients that will contribute proceeds, assets or entitlements, by means of advertising activity, for the account of the IIC or any entity acting on its behalf.

IICs can be marketed to any kind of investors (either professional or non-professional investors), but always in accordance with the constitutional documents of the IIC. Certain specific rules must be observed when marketing non-Spanish IICs, depending on whether the addressees of the IIC are professional or retail investors. Retail investors usually contribute to UCITS IICs.

3.3.7 Investor Protection Rules

UCITS IICs act in accordance with investor protection. Apart from being governed by the principles of liquidity, diversification and transparency (please see 3.4 Operational Requirements), all operation of this kind of IICs is based on investor protection. The following are some examples:

the obligation to issue the KIID and to upload it on the web (please see 3.1.2 Common Process for Setting up Investment Funds);

the obligation to solve claims and complaints from the investors, and the duty to have a customer service programme in place;

the possibility to establish a financial ombudsman (which is not mandatory) with the capacity to consider or dismiss claims and complaints;

the obligation to establish a procedure to solve conflicts of interest; and

the capacity of the CNMV to exact as many caveats or warnings, and as much information, in the prospectuses as deemed fit for the information and protection of the investors.

3.3.8 Approach of the Regulator

Please see 2.3.8 Approach of the Regulator.

3.4 Operational Requirements

The main restrictions for IICs, apart from those stated in the relevant constitutional documents, are the principles of liquidity, diversification and transparency.

Liquidity essentially means that the assets invested by the IIC must have a similar price between the valuation thereof and the date of transfer (ie, once the divestment is decided, the value at such moment must be similar to the value at the moment of the divestment, which must be quick as well), and that the reimbursements requested by the investors must be complied with within a short period of time.

At least 1% of the assets of the IIC must be invested in cash, in order to be able to comply with the reimbursements to investors.

Risk diversification means that the portfolio of IICs must be sufficiently invested in different assets, in order to limit the concentration risk. The main diversification rule for IICs is the prohibition on investing more than 35% in a single asset (including entitlements over such asset, and taking into account that the calculation of the percentage is made at the moment of the acquisition).

The IIC has to perfectly establish the investment profile in its documentation.

The law also establishes the duty to prevent and manage conflicts of interest, for the best benefit of the investors.

IICs must appoint a depositary, and such depositary must be either a credit institution or a certain type of investment firm (in particular, sociedades de valores and agencias de valores). The depositary must have its registered office in Spain, but can also be a branch of a foreign entity in Spain.

3.5 Fund Finance

IICs can incur indebtedness up to 10% of their assets, to cover a temporary shortage of cash, provided that such indebtedness is borrowed for a period of lower than a month, or by acquiring assets with deferred payments, with the conditions that are established by the CNMV. IICs cannot receive funds from the general public either by way of loan, deposit, temporary assignment or assets or other similar. IICs cannot pledge the securities and/or other assets integrating their portfolio, unless creating collateral securing the transactions made in (i) official secondary markets and (ii) OTC markets for derivatives.

Please note that these limitations do not affect IICILs, whose legal regime for borrowing is set forth in 2.5 Fund Finance.

3.6 Tax Regime

Taxation in UCITS IICs has the same tax regime as open-ended AIFs (ie, IICILs), so they are eligible for the reduced 1% CIT rate. Please see 2.6 Tax Regime.

4. Legal, Regulatory or Tax Changes

4.1 Recent Developments and Proposals for Reform

Changes in tax legislation are expected in the short term. The political parties supporting the new Spanish Government have announced the introduction of new tax measures that directly or indirectly affect the tax regime applicable to investment funds.

As far as is known, these tax measures will aim to:

increase the control of the Spanish tax authorities over IICs;

reduce the maximum stake that could be held by one single investor (directly or with other related parties) in eligible IICs (those benefitting from the reduced 1% CIT rate);

increase the personal income tax rate applicable to resident individuals from the maximum 23% to 27%; and

reduce the 100% participation exemption regime on dividends and capital gains to a 95% exemption (so 5% will be subject to corporate taxation in Spain).

In addition, the Spanish implementation of the UCITS Directive and AIFMD is expected to be amended in the short run, in order to implement in Spain Directive (EU) 2017/828 of the European Parliament and of the Council, of 17 May 2017, amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement. The amendment will include in both acts the reference to the engagement policy, development, publication and outcome thereof. This Directive was expected to be implemented on 10 June 2019, but Spain has not complied with the deadline due to a complex political scenario. A prebill (anteproyecto de ley) to amend several Spanish laws (including, without limitation, the aforementioned law and the Companies Act) was released on 24 May 2019, but the two electoral processes that Spain held last year delayed the implementation of the Directive. As of January 2020, no formal bill (proyecto de ley) has been filed with the House of Representatives to carry out such implementation.

Dentons Europe Abogados, S.L.U.

Law and Practice

Authors

Dentons
is the world's largest law firm by headcount, delivering quality and value to clients around the globe. The team in Spain provides market-leading advice on closed-ended fund formation, particularly private equity, direct lending and special situations funds. Clients include promoters in fundraising processes, investors seeking to invest in the primary market (at the initial or final closing of a target fund), or those seeking to invest or divest in the secondary market (through a secondary transaction with other LPs), as well as promoters and investors in “end-of-life” reorganisation processes. The team’s capabilities are complemented with a strong regulatory background; the firm also has wide experience in advising promoters willing to participate in funding rounds organised by Fond-ICO Global, CDTI (Centro para el Desarrollo Tecnológico Industrial) and the EIF (European Investment Fund). Last but not least, the team has proven experience in fund formation for retail funds and hedge funds and, in general terms, in the formation of all kinds of funds.

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